If you could buy a portfolio of shares at a 40 per cent discount, you should be very pleased indeed. This is exactly what higher-rate taxpayers can achieve by investing in venture capital trusts, nearly all of which would have beaten the FTSE 100 – down by 19.3 per cent – over a five-year period, taking into account 40 per cent tax relief.
Many have actually made money without taking into account tax relief over five years, with Close Brothers, Baronsmead, Northern Ventures and Foresight performing particularly well. Close Brothers VCT gained 114 per cent and Foresight 143 per cent.
Now, higher-rate taxpayers can invest up to £200,000 each year – for the next two years anyway – and receive total tax relief of £160,000 over the two-year period.
While investors can cash in their shares after three years, which entitles them to keep the tax rebate, in my opinion they are an excellent long-term investment because capital gains can be paid out as dividends free of tax. This factor, especially in view of the pension cap, should enable long-term investors paying higher-rate tax to get a tax-free uplift to their pension in most years.
However, it is wise to spread the investment between a number of trusts. Of those raising money or likely to in the near future, the ones I like best are Quester VCT 5, which has made a good start and has some interesting investments, Baronsmead VCT 4, which has an excellent record, Aim VCT 2, which has a highly experienced Aim team, and Close Brothers Aim VCT, which is likely to prove another top performer, having risen by 45.9 per cent in the past year.
Because of the wide spread of investments, well run VCTs are no more risky than an individual blue-chip share. Remember, the 40 per cent tax relief only applies to new money being raised and not to existing shares.